In this video we will discuss the "liabilities" in the equity section of the balance sheet,
IFRS and various ratios. Liabilities are classified as "current" or "long-term".
Current liabilities are obligations that are expected to be paid within the next
twelve months or the operating cycle (whichever is longer). Long-term
liabilities are obligations that are not expected to be paid within the next
twelve months or the operating cycle, but in the more distant future. Walt Disney's
current liabilities as of October 2nd 2010 are comprised of accounts payable
and accrued liabilities for 6 billion 109 million dollars. This
balance represents amount due to suppliers and other obligations still
unpaid but due soon. Current portion of borrowings for 2 billion 350 million
dollars needs to be paid in the near future. Un-earned royalties and other
advances are money received from third parties that have not been earned by the
Walt Disney. Walt Disney's obligations that need to be paid in the more distant
future (or past the 12 months following the balance sheet date) are
various borrowings for the amount of 10 billion 130 million
dollars, deferred income taxes for 2 billion 630 million
and other long term liabilities for 6 billion 104 million. The
stockholders equity section of the balance sheet is generally comprised of
two sections which are: "Contributed capital" and "Retained earnings". Capital
stock is an account increased by the par or stated value of the shares issued.
Additional paid-in capital account holds the "excess" amount paid over the "par
stated value". For example, if the par value of a common stock is $1 and the
market price is $10, for the issuance of one share, "Common stock" will increase by
$1 and "Paid in excess of par" will increase by $9. Retained earnings is the
corporations un-distributed earnings or net income less declared dividends.
Sometimes we will see "Accumulated other comprehensive income"
which is the aggregate amount of the other comprehensive income items such as
unrealized gains or losses from market value fluctuations for pension funds,
also possible for foreign currency exchange transactions. We may also see
"Treasury stock" which is the amount of money paid to repurchase corporation's
own common stock. "Non controlling interests" (or minority interest) is the
portion of the equity of subsidiaries not wholly owned by the reporting
company. This information will be reported in the stockholders equity
section if it is applicable to the corporation. Disney's shareholders equity
section shows that the company has preferred and common stock. Please note
that the company states the par value and the number of authorized and issued
shares. Par value refers to the stock value stated in the
corporate charter (it is also known as a legal capital) and enforces some
restrictions for the Corporation's management. They are defined and may vary
depending on the state of incorporation. To minimize these limitations
corporations may select low amounts such as 1 cent or 0.1 cent. Authorized
number of shares this is the maximum number of shares that a corporation can
issue. The number is stated in the corporate charter as well. Issued shares
is the number of shares that already have been issued. This way we can make a
judgment what portion of the authorized shares the company has already issued. If
all the authorized stock has been issued then no more money can be raised from
equity. We can see that as of October 2nd, Disney has not issued any of the
preferred stock. Disney's common stock has 1 cent par value. On October 2nd,
its authorized shares are 4.6 billion and issued shares are 2.7 billion. The
balance in the common stock account is 28 billion 736 million.
This balance combines the "par" and the "excess of par" in its total.
This conclusion can be made because 2.7 billion shares times 1 cent is much less
than the shown balance. Disney's retained earnings as of October 2nd is 34 billion
327 million. "Accumulated other comprehensive loss"
equals to 1 billion 881 million dollars. Treasury stock is accounted for it cost
on October 2nd Disney had 803.1 million shares for the total cost of 23
billion 663 million. Please note that the
Treasury stock decreases the total equity. Non-controlling interest is for
the total of 1 billion 823 million dollars. I wanted to
show you an equity section that better separates the "legal capital" (which was
par value times the number of shares issued). Let's look at a Las Vegas Sands
corporation. You can see that the balance in the common stock account equals the
number of roughly 708 million shares times the $0.001
dollars par value. The amount of "Cash collected from the issuance of stock"
would be the sum of the "common stock" and "Capital in excess of par value" account balances
or 5 million 445 thousand and 413 dollars
IFRS versus GAAP. Both IFRS and GAAP allow the use of
title balance sheet or statement of financial position. IFRS however
recommends the use of statement of financial position. Both IFRS and GAAP
require disclosures about accounting policies and judgments used by
management. Under IFRS current assets are usually listed in the reverse order of
liquidity. For example under GAAP cash is listed first but under IFRS it is listed
last. IFRS has many differences in terminology. For example in the equity
section, common stock is called "share capital ordinary".
Advantages and disadvantages of raising funds through debt. The
advantages are that the funds are raised without giving up any ownership rights.
The interest that is paid is an expense which decreases profits which are taxed,
therefore it decreases the amount of tax income tax paid in improves cash flow.
The disadvantages are that the corporation has to have cash to pay the
periodic interest payments (the "least" frequency would be once a year) and the
principle has to be repaid at maturity. When equity is used to raise cash the
new owners have a right to vote on major issues and to receive assets upon
liquidation as well as dividends. Dividends may be paid (or not) depending
on the Board of Directors decision so the "pro-s" are that the corporation may
decide to share (or not) some of the profits and do not have to deal with
repayment of principal. The downside is that more opinions have to
be considered. Some important ratios that are used are: current ratio which is
computed as we divide the "total current assets" by the "total current liabilities".
It measures corporations ability to pay its immediate obligations. If the company
has a current ratio of more than a 1 it is considered as "favorable". More
conservative analysts look for a current ratio of 2. For the purposes of this
course we will consider current ratio of 1 and more to be "favorable". If current
ratio is too high (for example, 4 or more), analysts usually criticize management
for lost opportunities. "Debt Ratio" is "total liabilities" divided by "total
assets" it measures the portion of assets financed by debt (previously discussed).
The trend analysis shows consecutive periods compared to base period. You can
see the Disney's total assets increased by 3% in 2008,
4% in 2009 and 14% in 2010 compared to 2007. All asset accounts increased
compared to 2007 except for Goodwill and Intangibles (in 2009 where they decreased by 3%).
You can also analyze the changes in the
non current liability and equity accounts compared to 2007. Current
liabilities increased by 2% in 2008, decreased by 22% in 2009 and 3% in 2010.
Liabilities will decrease as the corporation pays in a more accelerated
pattern and will increase when they enter in additional obligation or slow
down their payments. Common stock increased each year which means that
Disney issued more stock. Retained earnings increased which tells us that the
corporation had successful and profitable years and not all profits have been paid
as dividends. The common size balance sheet shows the proportions of the
various accounts compared to total assets. You can see that current assets
represented 33% of the total assets for a News Corp and only 18% for Disney.
Property, plant and equipment net of depreciation represents 26% for Disney
and 11% for News Corp. This approach can be applied to all accounts for the same
company in different periods or comparison of different companies.
If different companies are being analyzed please consider the industry under scrutiny.
Thank you for watching.